Wednesday, November 20, 2013

Divergences between risk assets warn of impending deflationary collapse

We are seeing large divergences between risk assets that have all been moving together since the March 2009 low. When the stock market bottomed in March 2009, commodities and other foreign markets bottomed at the same time. Since then, we have seen a tremendous reflation in all of these asset prices. But, since May 2011, we have seen a divergence between commodities and stocks, that only continues to grow as the stock market makes new highs while commodities do not. Back in the 1970's, during the inflationary secular bear market, all one had to do was own precious metals or commodities as a hedge against stagflation (high inflation and slow growth economy). Those who think the same is true now are mistaken. Stocks and commodities are both moving together as a function of liquidity in a deflationary secular bear market. The failure of commodities to move above their May 2011 highs while stocks continue higher, and the now over 2-year old gold and silver bear markets, are warning that all is not well and this liquidity-induced reflation is on its last legs.

 One by one, these risk assets are collapsing under the pressure of too much leverage. Stocks are the last holdout, and when they top out, with margin debt currently at all-time highs, the financial house of cards is set to implode on itself in a VERY swift manner. Once the proper setup is confirmed, the secular bear market will resume and things will get ugly. Stay tuned to my interviews at Cycles News and Views, which are posted on this blog, for the latest on markets. Meanwhile, the divergences are growing by the day and continue to get worse as this overextended move from March 2009 continues to pull more and more into the trap. I am warning, get out of all risk assets and move to cash before it's too late. Again, if anyone is unsure of what to do, please e-mail me. This is no time to be lackadaisical and complacent, but that is exactly what many are doing. They think Janet Yellen will keep markets afloat forever with QE and other central bank magic. This is a result of linear thinking that is a natural human tendency. Despite what many believe, QE will not continue forever and nor will this bear market rally. And, I believe we are getting very close to a very significant top in the market. We are going to get AT LEAST a sharp correction in the market. The market may attempt one more new high after this upcoming downtrend, but I would not count on it. The key will be whether the market impulses down in 5 waves, or moves lower in a corrective fashion. If we get a clear 5 wave impulse lower, the bear market rally is over. If the move down is corrective in nature and then moves above the previous high, the market will continue to uptrend into the final top of this bear market rally.

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